Data Center Absorption Geysers As Hyperscalers Flood DFW

Developers are scrambling to build new data centers in Dallas-Fort Worth as an influx of hyperscalers like Google and Amazon gobble up available space and power.

The DFW market absorbed nearly 287 megawatts of power in the first half of 2022, roughly five times the amount of power absorbed by the market on an annual basis, and about 17 times the 16.54 megawatts absorbed at the midpoint of last year, a new Cushman & Wakefield report found.

The majority of absorption seen so far this year consists of multiple leases by one hyperscaler, Cushman & Wakefield’s Global Data Center Advisory Group Executive Director Ali Greenwood said, though she remained tight-lipped on the user’s identity. 

“We had one user who made up for an exorbitant amount of absorption,” she said. “It’s rare to see a hyperscaler take down just one footprint in a market — they typically grow to three footprints fairly quickly.”

More hyperscalers moving into the market caused turnkey inventory to drop from about 509K SF to 345K SF year-over-year, while shell space fell from 1.2M SF to 352K SF.

That has created a tense dynamic for smaller, enterprise users, Greenwood said.

“[Hyperscale] buys are just so much larger, and it’s causing a lot of challenges for enterprisers to find space and capacity because, of course, operators and developers are going to take a full-building Facebook or Google deal over a half-of-a-suite KPMG deal, for example,” she said. 

Enterprise users have been particularly hard-hit by the surge in data center demand seen across DFW. But all users, hyperscalers included, stand to be impacted by a shortage of available power that is challenging the industry as a whole. This is especially dire in Texas, where Greenwood said an already constrained grid may be less capable of supporting the state’s massive data center growth.

“All the utility companies across the country are scrambling for ways to not only get around the natural gas/Ukraine issues we are having on the procurement of power, but how do they generate net new capacity to sustain the data center growth that is occurring?” she said.

The introduction of hyperscalers has also caused a shift in the way data centers are leased, Greenwood said. Whereas before, data centers were built with the intention of leasing speculative or shell space to multiple users down the line, today the vast majority of facilities are leased by a single user before construction begins.

“The majority of the absorption you’re seeing [now] and what you’ll continue to see through the rest of the year is made up of pre-leased and signed buildings that have not even been built yet,” Greenwood said. “ We have not seen that in our industry, ever.” 

There is roughly 2.8M SF of data center construction in the pipeline, up from 64K SF at the midpoint of 2021. It now takes four to six times longer to get the basic infrastructure needed to run a data center, which makes it much more difficult to bring new data centers online, Greenwood said.

“The only thing that’s holding anybody back is just the ability to get product out of the ground,” she said. “There is no shortage of demand.”

While not totally immune to economic turmoil, data center operators and developers are often backed by infrastructure funds, pension funds or publicly traded real estate investment trusts unencumbered by underwriting challenges seen by other asset classes. This should keep data center development humming along even during a recession, Greenwood said.

“There is literally more demand than you can shake a stick at,” she said. “The ones that are winning are the ones that are more capitalized, are able to take down hundreds of acres of land and get around supply chain issues to develop and deliver.”